Shell Australia’s money man on careful course

As keeper of the purse strings for Shell Australia’s $US30 billion worth of spending over the next five years, Michael Carey begins to get nervous when things start changing unpredictably, beyond the company’s control.

Handling risks around oil and gas reserves, production technologies and operational efficiency are bread and butter for any oil company, especially one as large as Shell. But it is different when it comes to fiscal and regulatory settings.

“Above-ground risk we get really concerned about," says Carey, vice-president, finance & strategy, at the oil major’s Australian exploration and production business.

“We just need to have confidence that the settings will be stable over several decades."

Shell rivals Chevron as the biggest foreign investor in Australia, with interests in the producing North West Shelf venture, in Chevron’s massive $43 billion Gorgon liquefied natural gas project under construction in Western Australia, and in several LNG projects under development, including the Prelude floating LNG venture, the Sunrise and Browse ventures and the Wheatstone venture.

On the other side of the country it has its 50 per cent interest in the Arrow Energy coal seam gas-based LNG venture with PetroChina.

In addition comes its downstream business, including a refinery, import terminal and fuel supply business, as well as its 23.26 per cent stake in
Woodside Petroleum
.

“We’ve got a big and exciting portfolio; from our perspective Australia has been a good place to do business," Carey says.

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He says Shell’s hefty spending commitments will not however have a bearing on how quickly the oil major further sells down its stake in Woodside, after an initial $3.3 billion sale of a 10 per cent stake two years ago. “That’s not a consideration for us," Carey says.

But it is no secret that Shell is worried about the way the investment environment is trending in Australia, with not only country chairman Ann Pickard but global chief Peter Voser speaking out about rising costs, the squeeze on labour and below-par productivity.

“We’ve got some concerns at the moment about the competitiveness of the LNG industry; it’s being challenged by some internal factors as well as external factors," he says.

He singles out the high Australian dollar, which is increasing the costs of local operations in US dollar terms, “escalating" labour and input costs, exacerbated by the remote locations of LNG ventures.

The cost of building offshore gas ventures in Australia is already triple similar projects in the offshore gulf of Mexico, while Australian industrial projects in general are about 40 per cent more costly than on the US Gulf coast, Carey says. “This is a feature of their remoteness, competing for skilled management and labour to build projects and develop them, the availability of logistics: all of these things add to the pressures."

The emergence of LNG supply competitors – after a golden period when Australia appeared the world’s only LNG expansion prospect – provides further complications.

Carey notes the “very interesting gas resource" that has been found in east Africa and the “shale gas revolution" in the US, which has prompted a turnaround in the country’s status from a net importer of LNG to a prospective exporter.

That sets a challenge for Australia to capitalise on its “abundant" gas resources, including coal seam gas and shale gas as well as conventional offshore fields, Carey says.

“The key thing we need to do over the coming years is to make sure that the next projects that are coming up for a decision have a really competitive cost basis to be able to compete for LNG demand," he says.

“LNG demand is available in large pieces of demand where we need to get commitments for 20 years of supply, and so projects need to be able to compete for that demand based on their cost."

With several of its LNG ventures yet to reach a final investment decision – and therefore in doubt at least to some extent – Shell is in the thick of it on that front.

Its
Arrow Energy
project with PetroChina has attracted the most speculation and is seen as one of the most vulnerable to a delay or cancellation given the three similar projects already being built by rivals in Gladstone and the location of some of its key licences in the Surat Basin plumb in anti-coal seam gas heartland.

But Carey insists “nothing has changed" on Arrow’s plans for a late-2013 final investment decision, nor on Shell’s keenness to see the $20 billion-plus project developed. He says the partners had from the start planned a later development for the Arrow project than their three rivals, to avoid construction at the same time as six other LNG trains on Gladstone’s Curtis Island.

“From an investor’s perspective we understand that Australia requires development of commercially viable discoveries but getting the timing of them right, so we are not competing for scarce resources to develop the projects, is a key consideration," Carey says.

“We are cognisant of some of the concerns that are being speculated on but for our project we are continuing with the work that we plan to do, and towards the end of next year we will have completed that and we will see what decision we will have."

Certainly with a capex budget running at $1 billion a year in the run-up to a final go-ahead, and about $4 billion sunk on the acquisitions of the original Arrow Energy and of CSG explorer Bow Energy, Shell and PetroChina have shown strong commitment to their project in financial terms already.

Turning to the troubled Browse project, Carey is tight-lipped about whether Shell is any more comfortable with venture operator Woodside’s plans to build the onshore plant at the controversial James Price Point site on the Kimberley coast, an option that has been criticised by Pickard.

Shell has just increased its stake in Browse by taking over Chevron’s stake, triggering speculation that Shell may ultimately be aiming to develop the large gas resource using its own floating LNG technology.

Carey won’t comment on Shell’s latest thoughts on James Price point versus floating LNG. Under the terms of their offshore gas lease, the partners are obliged to reach a final investment decision on Browse LNG in the first half of 2013.

“The Browse resource is a large resource so we’ve got confidence in it for the future," Carey said.

“On the current development we’re working with Woodside on that as one of the joint venture partners and we’re operating under the retention lease obligations. We’ll see where that project gets to by the middle of next year when we’ll have a much better view on how the project is developing."